Inflation Perceptions Research Articles

INFORMATION RIGIDITIES, INFLATION PERCEPTIONS, AND THE MEDIA: LESSONS FROM THE EURO CASH CHANGEOVER

The objective of theoretical models of information rigidities is to capture the fact that people are constrained in their ability to acquire and process all available information. Given that most people obtain their information about the economy from the media, press coverage of the economy may exert an influence on peoples' attitudes. This paper tests for this influence by examining consumers' inflation perceptions in the aftermath of the euro cash changeover, which serves as a natural experiment. Using a new data set, that quantifies the intensity and tone of media reports, we document that media reporting has had a statistically significant and economically meaningful impact on inflation perceptions and contributed to their sharp rise in the aftermath of the euro cash changeover and to the divergence between inflation perceptions and actual inflation rates. (JEL E53, D83)

Frequency bias in consumers׳ perceptions of inflation: An experimental study

We investigate whether the perception of economy-wide inflation is affected by the frequency with which various goods׳ prices are observed. We provide novel experimental evidence that consumers׳ perceptions of aggregate inflation are systematically biased toward the perceived inflation rates of the frequently purchased items. This ‘frequency bias’ may affect consumers’ consumption and investment decisions, and thus have important macroeconomic consequences. It may also explain why consumers typically over-estimate inflation in surveys during periods where frequently purchased non-durable goods are inflating faster than durables.

Assessing the sensitivity of consumption expenditure to inflation sentiment in post-communist economies

The aim of this article is to examine the influence of inflation sentiment on aggregate consumption. The study adds to the existing literature by i) emphasising the role of inflation perceptions and expectations in determining consumption patterns, ii) using structural VAR methodology that has not yet been applied in consumer studies, iii) employing an extensive dataset of eight individual post-communist countries (Czech Republic, Estonia, Hungary, Lithuania, Poland, Romania, Slovakia and Slovenia). Using innovation analysis it is shown that the theoretically expected conclusions are valid: consumers instantaneously decrease their consumption expenditure in response to shocks in perceived inflation, while their reaction to shocks in near-term inflation expectations is an abrupt (but temporary) consumption boost.

The Cognitive Mechanism and Influential Factors of Perception of Inflation

The perception of inflation is a subjective experience of inflation. The cognitive mechanism of perception of inflation is generally reflected in the price experience phase and the integration phase: the price experience phase mainly involves individual’s susceptibility and memory; the integration phase mainly involves availability heuristic, anchoring and adjustment heuristic. Additionally, it is suggested that many factors make impact on the perception of inflation, including the expectation of inflation, framing effects, price fairness, social amplification, currency changeover and so on. Future studies could focus on exploring information processing mode, cognitive-neural mechanism, cross-culture influential factors and new index with high ecological validity.

How to Define the Consumer Perceived Price Index? The Case of Poland

Inflation perceived by consumers may differ from official statistics particularly due to different baskets of goods and services lay people and statisticians consider and by consumer loss aversion to price increases. Such effects, as suggested by the Prospect Theory, are confirmed in many empirical studies, showing that consumers are substantially influenced by prices of frequent purchases and that price increases are perceived more strongly than price decreases. Following those observations, particularly useful in interpreting a jump of inflation perception in some of the EMU economies after the euro introduction, an alternative price index, i.e. the Index of Perceived Inflation, was proposed by Brachinger (2006) and Brachinger (2008). The role of price changes of frequently bought goods and services in determining consumer opinions on price changes was also significant in Poland, especially after its accession to the EU. To assess whether this effect is of a systematic nature, in this paper we develop different indices of price changes of frequently bought goods and services in Poland, including the Index of Perceived Inflation. Then we evaluate these indices vs. CPI inflation in terms of their impact on consumer inflation perception, as proxied with survey data. The results suggest that Polish consumers observe a relatively wide range of goods and services and that both factors suggested by the Prospect Theory seem to influence their opinions on evolution of prices in the past. Having the measure of perceived inflation – i.e. the Consumer Perceived Price Index (CPPI) – that seems more adequate than current CPI inflation on the one hand and survey-based measures of perceived inflation scaled with respect to the trend of CPI inflation on the other hand, we use it as a scaling factor to derive a probability measure of consumer inflation expectations in Poland. Then we compare forecasting accuracy of this measure with respective results based on the measure of consumer inflation expectations quantified in a standard manner.

Perceived inflation under loss aversion

Building on prospect theory, we apply the concept of loss aversion to the formation of inflation perceptions and test empirically for nonlinearities in the inflation-perceptions relation for a panel of 10 Euro area countries. Specifically, under the assumption of loss aversion, inflation changes above a certain reference rate will be perceived more strongly. Rejecting rationality of inflation perceptions in general under symmetric loss and in a majority of cases under flexible loss functions, panel smooth transition models give evidence of nonlinearities in the inflation-perceptions relation regarding both actual inflation and time. This result is confirmed by dynamic fixed effects estimates, where the slope of the estimated value function is significantly steeper in the loss region and the implied average reference inflation rate is found close to 2%.

An international comparison of inflation credibility surveys

This paper analyses the methodology used in assessing inflation credibility (i.e. perceptions of the accuracy of historical inflation rates) in countries targeting inflation, and compares the approaches used in New Zealand, South Africa and Sweden. The results indicate an implied inverse (or negative) relationship in all but one instance, between the direction of actual inflation and the perception of inflation among the respondents. The analysis also shows a lack of knowledge about inflation and price increases among South African respondents, which is absent from similar surveys in New Zealand and Sweden. Important research questions identified include possible links between inflation credibility and the adoption date of inflation targeting, as well as the type and range of targets used.

A study on inflation credibility among students at the University of Pretoria

Following on five pilot studies on inflation credibility in South Africa aimed at the construction of inflation credibility barometers and a literature review of the international measurement of inflation perceptions, this paper reports the findings of a study on inflation credibility among 493 students at the University of Pretoria. Credibility barometers are reported for different genders, for Asians, blacks, coloureds and whites, and for students in different faculties. The main conclusions are that the inflation perceptions by the different genders in this study do not correspond with international experience in this regard; international use of inflation barometers will ensure comparability of inflation credibility; and that inflation-targeting countries should sample inflation credibility and calculate an inflation credibility barometer.

Non-Positive Scaling Factor in Probability Quantification Methods: Deriving Consumer Inflation Perceptions and Expectations in the Whole Euro Area and Ireland

There are problems with using probability quantification methods designed for polychotomous survey questions when the scaling factor applied in those methods becomes non-positive. The way of adjusting probability methods proposed in this article and verified empirically allows using them in such circumstances. The results for the euro area and Ireland suggest that the recent financial crisis made consumer inflation perception and expectations go down; however, it did not create deflationary expectations in this group of economic agents.

Relative Price Changes and Households' Welfare in Italy

The entrance of Italy in the Euro area in 2001 has given rise to a wide debate about the perception of inflation on households' well‐being. However, most of the debate has involved the measurement of the “correct” consumer price index at the national level. Much less analysis has been carried out on the distributional consequences of inflation on every household. The paper addresses this issue by performing a microsimulation analysis of the impact of inflation on Italian households in the period 1997–2007. It is shown that the impact of inflation has an ambiguous path over the period, with a large concentration of welfare losses around the introduction of the Euro currency. In particular, it is found that poorer and larger households are severely hurt by inflation and that the prices ofgasandgasolineare largely responsible for determining the living conditions of Italian households.

“Real-Feel” Inflation: Quantitative Estimation of Inflation Perceptions

Inflation expectations are believed to influence actual inflation and therefore policymaker actions. However, methods usually employed to evaluate inflation expectations are insufficient. Survey methods either record economists’ forecasts of the official Consumer Price Index (CPI) (which isn’t what policymakers need to know) or consumers’ attempts to calculate their own inflation experience. Consumers have little chance to perform the calculations needed to accurately compute inflation. I propose functional forms to substitute for the heuristics consumers actually use to form inflation perceptions. I also propose adjustments to reconcile official price measurements with consumers’ perceptions. These adjustments are corrections for cognitive biases related to loss aversion and mental accounting.

Framing online promotions: shipping price inflation and deal value perceptions

PurposeThis research seeks to examine differences in perceived shipping charge inflation associated with online promotions presented as reducing base product price, reducing shipping surcharge, or reducing all‐inclusive price and its impact on deal values for shipping charge skeptics and non‐skeptics.Design/methodology/approachDrawing from research on multi‐component pricing and mental accounting, a laboratory experiment investigates if shipping charge skeptics differ in their perceptions of shipping charge inflation for different presentations of online promotions from non‐skeptics, and if they differ in perceived deal value of economically equivalent promotions presented as reduced product price, reduced shipping charge promotion, or reduced all‐inclusive price for high and low priced items with small or large shipping fees at retail websites.FindingsAnalyses show that shipping charge skeptics differ from non‐skeptics in their perceptions of shipping charge inflation and deal values for different online promotions only when the surcharge is large relative to the base price. Reduced price promotions are most attractive for high‐priced items with low surcharge but least attractive for large surcharge sizes. For large surcharge sizes, shipping charge skeptics prefer reduced all‐inclusive price promotions to reduced shipping promotions, while non‐skeptics prefer reduced shipping promotions to reduced all‐inclusive price promotions.Research limitations/implicationsThe results suggest that the effectiveness of various promotion frames at online stores differ based on base price, surcharge size, and consumer skepticism of shipping charge. Robustness of the results obtained at different levels of discount sizes need investigation.Practical implicationsOnline retailers that have to charge high shipping fees can use promotions to shift the referent price component used by consumers to calculate savings and mitigate perceptions of shipping or base price inflation. For equivalent dollar savings, retailers can use reduced shipping charge promotions to communicate higher deal values to shipping charge non‐skeptic consumers than reduced base price or reduced all‐inclusive promotions.Originality/valueThis research examines how consumer perceptions of deal values differ, even though objective savings and financial outlay is the same, when promotions are presented as reducing product price versus surcharge.

THE FORMATION OF INFLATION PERCEPTIONS: SOME EMPIRICAL FACTS FOR EUROPEAN COUNTRIES

ABSTRACTThis paper investigates how households form their perceptions of consumer price inflation. Using data from the harmonized European Union consumer survey, we find that inflation perceptions are inefficient and highly heterogeneous, yet contemporaneously related to the actual rate of inflation. Consequently, we estimate how often households update their beliefs usingCarroll's (2003)epidemiological model. Our results indicate that inflation perceptions are generally less responsive to new information than expectations. Unlike studies on expectations, we cannot confirm that a constant fraction of the population updates information every month. Also, the cross‐sectional heterogeneity of perceptions is higher than implied by infrequent updating alone.

Inflation Developments and Perceptions after the Euro Cash Changeover

Abstract This paper analyses the evolution of inflation and of consumers’ inflation perceptions in the aftermath of the euro cash changeover. It finds that the cross-country variation of food product inflation was dependent on the complexity of conversion rates, with statistically significant and economically sizeable effects especially for low-priced items sold in mid-priced stores. The paper also shows that cross-country differences in the mismatch of perceived and actual inflation were linked to differences in the complexity of conversion rates. These results are in line with theories of finite information-processing capacities on the side of consumers.

Inflation Perceptions and Expectations in Sweden - Are Media Reports the 'Missing Link'?

Inflation Perceptions and Expectations in Sweden - Are Media Reports the 'Missing Link'?

Inflation Perceptions and Anticipations in the Old Eurozone Member States

There is empirical evidence that the introduction of the euro led to a signifi cant increase of perceived infl ation in most countries. Such an increase and persistence in the perceived infl ation might then have an impact on infl ation expectations and other macroeconomic variables. The authors have used expectational errors to describe the difference between infl ation expectations/anticipations and its observed values, subsequently to identify the causality between these variables.

Inflation Risk Premia in the Term Structure of Interest Rates: Evidence from Euro Area Inflation Swaps

We estimate inflation risk premia in the Euro area using inflation swaps. By proposing a no-arbitrage model for econometric analysis, and estimating it using Markov Chain Monte Carlo, we find estimates of inflation risk premia, that on average show an upward sloping term structure, with 1 year risk premia of 13 bps and 10 year risk premia of 52 bps, however with fluctuation in risk premia over time. Our estimates suggest that surveys are important in identifying inflation expectations and thus inflation risk premia. We relate estimates of inflation risk premia to agents beliefs, and find that skews in short term inflation perceptions drive short term inflation risk premia, where beliefs on GDP growth drive longer term risk premia.

The Effect of Question Wording on Reported Expectations and Perceptions of Inflation

Public expectations and perceptions of inflation may affect economic decisions, and have subsequent effects on actual inflation. The Michigan Survey of Consumers uses questions about “prices in general” to measure expected and perceived inflation. Median responses track official measure of inflation, showing some tendency toward overestimation and considerable disagreement between respondents. Possibly, responses reflect how much respondents thought of salient personal experiences with specific prices when being asked about “prices in general.” Here, we randomly assigned respondents to questions about “prices in general,” as well as “the rate of inflation” and “price you pay.” Reported expectations and perceptions were higher and more dispersed for “prices in general” than for “the rate of inflation,” with “prices you pay” and “prices in general” showing similar responses patterns. Compared to questions about “the rate of inflation,” questions about “prices in general” and “prices you pay” focused respondents relatively more on personal price experiences - and elicited expectations that were more strongly correlate to the expected price increases for food and transportation, which were relatively large and likely salient, but not to the expected price increases for housing, which were relatively small and likely less salient. Our results have implications for survey measures of inflation expectations.

Monetary policy credibility and inflationary expectation

Since there are significant biases in the individuals’ inflationary expectations, the role of monetary policy credibility needs to be reconsidered. Theoretically, policy credibility can influence the policymaker’s plan of action or reflect his preference. Thus, when prices rise, perceived credibility not only stabilizes public expectations of inflation, but also becomes important information, which can be used by the individuals to improve their expectations. The econometric analysis of a large-scale survey largely confirms these theoretical predictions. The perceived policy credibility as well as inflation perceptions and education plays an important role in the individuals’ inflationary expectations.

From actual to perceived transparency: The case of the European Central Bank

Over the last decades central banks have become much more transparent about their monetary policy making process. In the literature, the increase in central bank transparency has frequently been related to (changes in) the actions of economic actors. However, the fact that these actors might not even be aware of the increased transparency or might not perceive the central bank as any more credible or transparent as a result of it is neglected in the literature. By analyzing data of a Dutch household survey on the (perceived) transparency of the European Central Bank (ECB) we delve into those neglected issues. We find that transparency perceptions matter for inflation perceptions and expectations as well as for trust in the ECB. However, we also show that the link between actual and perceived transparency is weak. Not only because of poor transparency knowledge but also because perceived transparency is influenced by many individual and psychological characteristics.